By: Caroline Troy, Troy Valuations
The Effective Date or Valuation Date is the date at which a business valuation is calculated. It is the specific point in time at which the conclusion of value applies. Generally, the Effective Date is associated with the corporate year end. It can also be associated with a specific event which has occurred on a specific date. For example, in divorce proceedings the valuation date could be the date of separation.
Recently, I had the opportunity to learn about the impact of different choices of valuation dates. I was hired to opine on the value of a book of businesses, for a stockbroker. In Canada, many banks and investment houses charge clients a fee to administer their stock portfolio, rather than charging a commission for each trade. The banks then pay the stockbrokers’ a fee on the total value of their book of business which is referenced as “assets under management” or AUM. The AUM is typically valued at the close of each trading day.
Jane and Joe (pseudonyms) separated in December 2018. Joe was a stockbroker, operating as a sole proprietor. There was a long period of negotiation between Joe and Jane to divide the matrimonial assets. But eventually, both Jane and Joe sought out professionals to aid the negotiations. I was hired by Jane in February 2020 to provide an opinion of the value of both businesses as at a date to be determined for the purpose of negotiating an equitable division of matrimonial assets.
Joe hired a different valuator to provide an opinion of the value of his AUM. The valuation date selected by Joe’s valuator was March 31, 2020.
In January 2020, World Health Organization (WHO) announced its first situation report of a novel coronavirus, COVID-19. On March 11, 2020, WHO declared the COVID-19 outbreaka global pandemic. Stock markets around the world took the news badly. Stock prices in Canada entered a near free-fall during the period February 19, 2020 – March 23, 2020.
Here is a chart of the closing price of the Toronto Stock Exchange (TSX ) during the period September 2018 through September 2021. You can see the dramatic drop in the TSX over the subject period. The dates of the separation and the valuation report are annotated on the chart. Jane wanted to value the book at December 31, 2019. Interestingly, this would have valued the book at the top of the market. Joe’s evaluation was dated March 31, 2020.
What is fair?
It is an interesting case study in choices of valuation dates and the effect these can have on the division of matrimonial assets.